Why you’re more likely to lose a sale by underpricing than you are by over-pricing

Good news!

the client said.

You’re our preferred bidder.

Awesome, I thought.

We’ve just got a couple of queries...

the client said:

Firstly, are you ok with travelling abroad?

Secondly, we think you’re too cheap!

Whoa, just hold on a minute. 

Too cheap? 

I definitely had no aspirations to be a cheap consultancy. 

And you can’t afford to be in your consulting business either!

Why can't you be low cost?

The only way to be cheap successfully – or more appropriately, to be the lowest cost provider – is to do it at massive scale.

Think McDonalds-level scale.

They offer probably one of the cheapest burger meals you can get (let’s not get into a quality discussion), but McDonalds can afford to be so cheap because it does it at massive scale.

There's nothing bespoke about a McDonalds burger, unless you deliberately choose to leave things out of it. 

And anyhow, when did a client last seek a cheap consultancy?

It’s the equivalent of looking for a cheap doctor.

Granted, if you're American, there are plenty of people willing to go to Tijuana for some cheap plastic surgery, but we all know that ends up costing them much, much more in the long-term. Just watch an episode of Botched! (I can't believe I admitted in public that I watch that show!). 

No, instead of being cheap, your consultancy needs to be expensive! 

As the Stella Artois ads used to say:

Now, back to the opportunity at hand.

I was in a competitive situation. But I was clearly in a strong position because the client was letting me know that we were too cheap! 

If they were buying on price (and I don’t believe anyone buys on price alone), they’d simply award me the contract.

Of course, they weren’t buying on price, yet they were talking to me rather than my competitors.

That was a very positive thing!

My response to their queries:

Of course I’m happy to travel.

And no, we’re definitely not cheap!

Here’s what else I said:

If our fees have come in significantly lower than our competitors, then it means one of two things:
Either we’ve misunderstood the scope and scale of the project.
Or our competitors have misunderstood the scope and scale of the opportunity.

Of course, it was plainly obvious that, as I was the one having the discussion about being too cheap, it was me who had the misunderstanding.

So what to do about it?

I offered the client the following two options:

  1. I could review my bid and if I deemed it appropriate, resubmit with an increased fee (and possibly scope).
  2. We could get started on the project under the proviso that I reserve the right to review our fees within a 4-week period. That way I could get started on the project (become the incumbent – a key aim for every consulting business), and I would be in a better position to evaluate the project, and to determine just how much I misunderstood.

The client’s response?

If you review your bid now, under our procurement rules we'll have to re-evaluate our decision.

I hesitated for not one second. I said:

Ok, Option 1 is now no longer on the table.

This only left Option 2. And I’m pleased to say that we were engaged on the project.

Within the first 4 weeks we did indeed improve our understanding of the project resulting in the doubling of our fees from £40k to £80k.

And that was it. I’d learned my lesson.

Or had I?

As it turned out, no, I hadn't!

The second time I found myself in this situation, my client was a large UK insurer.

We’d done some great work for them on a strategy engagement and so were well placed as the incumbent to help them on the next stage of their project. 

I was asked to submit a proposal.

Excitedly, I scoped out the project as I saw it, and I submitted my proposal.

It was £25k.



I didn’t hear back from the client for about 3 weeks.

My primary contact for proposal submissions was the Head of Procurement.

He was a very intelligent guy who, for a procurement professional, had a rare understanding of the concept and value of win/win outcomes.

We’d built a great working relationship, and when we did finally meet, I asked him what he thought of the proposal.

His response:

Don’t ever submit anything like that to me again!

Oh oh! What had I done!?

This was not the response I was expecting.

He then went on to explain that I had under-pitched the opportunity by such a margin that he daren't even show the proposal to anybody else.

Like I said, he was a smart guy.

He knew that if he showed it to anyone else, he'd look just as stupid as I currently did!

In thanks to the strong relationship and mutual respect, he granted me the opportunity to revise my bid and resubmit.

Which I did.

This time, the fee was £169k.

Nearly 7x the original fee!

And we won the work. 

So what would have happened if I didn’t know the client well?

Chances are I’d never have gotten the opportunity to get to know them well.

By underpricing I’d demonstrated a misunderstanding of the project, and thereby, a misunderstanding of the client.

I’d have made it clear – my proposal shouted from the rooftops:

We weren’t a fit!

And that’s exactly what I'd done in the two examples above.

Only I was lucky that in each case I had strong client relationships that enabled me to weather the storm that I had created!

I was able to recover from my mistakes.

Most people worry that their fees will be too high

The bigger risk to your business is in being too cheap.

Why do I say that?

Because it’s a whole lot easier for someone to tell you that you’re too expensive, than too cheap.

Just think about it.

Have you ever gone into a shop to buy a watch?

Looked at something really nice. Very high-quality. Only to ask the price and be surprised by how low it was?

What did you do?

Chances are it would have immediately reset your expectations as to how high-quality it actually was. You'd likely just move on under the assumption that the item wasn’t as good as you’d thought!

What you certainly wouldn't do is to ask to pay a higher price for it!

You might have asked to se something more expensive though.

Remember, no-one buys on price alone!

The only people forced to buy on price are the public sector, and even in those circumstances people find ways around it.

This is why it is so much more appropriate to overbid than underbid.

If your price is too high, and the client likes you, you’ll typically get the opportunity to negotiate.

But if the price is too low, it’s usually:

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